So you can protect your investment from inflation


By CAPosts 23 February, 2021 - 05:01am 50 views

If there is something that no one escapes when investing, it is the ravages of inflation. This factor invariably affects the real return on investments, and thus, investors seek to hedge against inflationary pressures with various assets. One of the most attractive instruments for investors who are more cautious is government fixed income (bonds), but it is also one of the most exposed to inflation. The story is different between investors who have their portfolios in the local market - that is, in Mexican government debt - and those who seek refuge in a safer instrument such as US bonds.

© iStockphoto Inflation is one of the main ones Factors to consider when it comes to investing

In Mexico, bond yields have been declining; However, the level of inflation (3.54%) and the yield on Banco de México bonds (which is 5.61% at 10 years) maintain a still attractive relationship, while the exchange rate of the peso against the dollar does not collapse. Despite the increase in inflation in January (which went from 3.15% in December to 3.54% in January), it is not considered to be something that “should take away the sleep of the Mexican investor who invests in local assets”, according to Esteban Polidura, director of advisory and products for the Americas region for the Swiss financial institution Julius Baer that manages 484,000 million dollars. The issue becomes worrying when investors have - as almost everyone usually has - a part of their portfolio invested in bonds of the United States Federal Reserve (the so-called Fed). The return of the Fed's 10-year bonds has rebounded to 1.4%, while inflation in the United States stood at 1.4% annually, which is beginning to be seen as a risk on virtual earnings in the portfolios containing these instruments . For some analysts such as Esty Dwek, head of global strategy at fund manager Natixis IM, the risk of rising inflation is not as severe as it is not expected to last as long. "We hope the Federal Reserve perceives it, as we do, as transitory," Dwek wrote in a report. However, the perceptions of each investor also come into play, so they may be looking for options to shield the international portfolio against inflationary risk

A big no The old reliable

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In unison, investors say no to having cash in this scenario. Cash is the one that "usually performs the worst because money erodes," said Polidura. This point is relevant considering that one out of every three Mexicans does not obtain returns for their money. In other words, it has a "little box" under the mattress that all it does is lose value due to inflation. Gold is one of the preferred hedges to deal with inflation in the long term, but it is not so accurate in the short term. Gold has had a history of holding its value for a long period, but in the short term it can fluctuate. One example is that from the first weeks of the pandemic, in March 2020 until Monday, the performance of gold futures registered an increase of 8%. However, so far this year, the metal has fallen 5% to $ 1,809.97 an ounce, according to Bloomberg. "Seeing gold not as an entry-by-exit investment, but as a long-term hedge, it really covers you with considerable risk," said Luis Garinian, founder of Pesos y Sesos Academia de Finanzas.

Selective between stocks Diversify in the diversification

Another strategy for an investor, who seeks protection against inflation, is to focus on companies that are listed on the Stock Exchange and that can transfer the increase in costs (due to an inflationary effect) to the final price and thus transfer it to the client, explained Polidura . Some examples can be found in tech companies or automakers listed on the stock market. Exchange traded funds (ETFs), which track indices, commodities or even cryptocurrencies, are useful if you need to protect yourself from risk and it is not possible to follow each of the assets in detail. In these instruments, those that follow commodities such as oil and gas - oil & gas - or that gather bonds from different developed countries can provide greater certainty and protection against periods of risk. As an example of this protection offered by some ETFs is iShares US Oil & Gas that so far this year has registered a return of 31%, according to data from its creator BlackRock, the largest investment fund in the world. "ETFs are a great way to democratize investing for people who don't have time to build a perfect portfolio," Garinian said. With these instruments, people can access various sectors, and different companies in various countries, without having to invest large amounts of money. An iShares US Oil & Gas security has a market value of around 47 dollars (940 pesos) and has exposure to 38 of the main companies in the sector on the Dow Jones, one of the main stock indices in the United States. Source: MSN